March 21, 2008

I am sure you hear that all the time. But for me it’s true. In several ways. But for now, let’s focus on my career. Being a musician before law school, I knew that there was only one type of lawyering I wanted to do…trial work. After all, the jury was just a smaller audience. And I had already been studying the dynamics surrounding the feedback loop that occurs when a group of people give heir attention to one person. I had learned through my days as a rock musician that attention is both empowering and malleable. So trial law was a natural for it. And if I do say so myself, I was one MF of a trial attorney. I loved the pressure, the focus, the need to be totally aware of your surroundings and having someone interests or even freedom, in my hands. Pretty heady stuff. for sure.

Trial initially grew out of the days when the “royals” would each select a champion to do battle for them to resolve their disputes. (The magazine for a national criminal defense association is actually called “The Champion”) And I loved the combative nature of trials. Within the framework of a strict set of rules, at its core, it is still war! However, as my law practice changed over the years, trials grew fewer with only one a year, and if I did not get my “fix” of combat I would tend to get even more surly that normal, which is already pretty surly! Around this time I found Quake…

Well it turned out that Quake was able to fill the void created by my lack of trials. My “blood lust” was sated by virtual fighting shoulder to shoulder with my fellow Clan members in F8S. And at that point in my career I was starting to tire of the total BS surrounding civil litigation and no doing much of any criminal work any more either. So, it was time. And Quake had some added bonuses. The community of folks playing QW Thunderwalker CTF became my tech mentors. Playing online I learned a ton about networks and needing to upgrade from time to time, I learned about PC’s. And out of my interest I started to learn way more than any sane lawyer should know about everything from polygons to algorithms. And many of the folks from the Old School TW days moved into the industry and we see each other often at the industry events, adding a sense of continuity to this whole crazy trip. But most of all, Quake introduced me to the game industry that I have grown to love and found a home in and to the folks who makes then. And now I have the pleasure of doing what I can to help those folks make those life changing games we play and love.

Now I no longer need a trial to “get right.” and do nothing but Game Law for a living. I even still play Quake every once in a while.

March 16, 2008

Let’s start with a few basic concepts. Developers make games. Successful developers sell their games. Publishers are the vehicles through which developers sell their games. Too often a developer says, “We just want to make great games” while the publisher says, “We just want to make money.” Unfortunately, that is all too often the result. The developer makes the game while the publisher makes the money. Why? Because the publisher is in the business of making money, not just in the business of selling games. That means maximizing their revenue from the exploitation of all aspects of the games they sell. If a developer believes otherwise, even if the developer makes money, they may well be getting the short end of the whole deal.

Clever Business People

There are some things that Publishers excel at and one of them is coming up with new and innovative ways to commercially exploit games. This means more revenue from the games we make. Of course, we have to be savvy enough to ask for our share of this additional ancillary revenue to get some. Often the developer is so focused on getting a publisher to sell their game that all they look at are the royalties from game sales. If all the developer asks for is a portion of the revenue from the sales, what’s all they’ll get, regardless of how much ancillary revenue a game generates. And publishers are getting really good at finding innovative ancillary revenue streams from the games the sell.

A Case Study

A developer I met at GDC contacted me a few months ago. They needed my help on a publishing deal with a major publisher. These guys had been doing licensed games for years and making a decent living doing it. Now they had a shot at releasing their own original IP. The publisher wanted the game to add to their portfolio for presentation to the press at E3. And they were willing to do the deal allowing my client to retain ownership of their IP with a favorable royalty rate on sales. Tentatively, a really good deal. So, it came to me to review the contract and see what I could do to earn my fees by making this deal as sweet for my clients as possible.

As expected, there were some of the usual “minor” issues with the contract that had to be addressed, and a few twists. Although the royalty split as acceptable, there was mention of the publisher’s right to exploit several additional potential ancillary revenue streams with no participation by the developer. In-game advertising, for example, was included with no revenue split. There was also a vague reference to the publisher having a right to B2B relationships relevant to the game, but no description of exactly what that meant. When pushed for the details of what sort of B2B deals they might be looking at, the publisher just danced around any meaningful answer. Of course, this sort of behavior made me even more suspicious that this might represent a clever new revenue stream from the game. Call it my jaded lawyer’s suspicious nature.

Eventually, through some rather persistent negotiating, we were able get the publisher to agree to pour any in-game advertising and any B2B revenue into the revenue pool. I pushed for a straight 50/50 split on this ancillary revenue because, in effect, this is found money for everyone involved. And as my old buddy, super agent Barry Friedman, likes to say, “All deals start at 50/50!” But, the publisher held firm to applying the same royalty split to all revenue from any source. But just in case the publisher found any other way to exploit the game that was had not covered, I also include in the contact a “catch all” provision pouring any and all revenue from any commercial exploitation of the game from anywhere into the royalty pool to be split with the developer. Of course, there is always the accounting of these revenues later to be dealt with, maybe even an audit or two. But this could ultimately mean a significant amount of additional money for the developer.

Modern Problems

As I said, publishers are not the business of just selling games; they are in the business of making money. Any time a new or unusual revenue stream comes into play it is the publisher who initially benefits. This includes anything from lunch boxes and action figures to movie rights. For example, when in-game product placement began, developers rarely saw any part of these revenues . . . at least until they started asking for it. The same thing occurred with in-game advertising. Again, this was additional revenue to the publisher long before developers ever saw any share of it. But as the development community became aware of these revenues, developers started asking for, and getting, their piece of the pie.

Developers owe it to their own success to be aware of and always seek to participate in these new inventive ways to commercially exploit the games they make. When negotiating your deals always push for an even split on these ancillary revenues. After all, they do not have any of the risks or costs associated with their distribution of the game itself. No funding, no marketing budget, no manufacturing costs, no distribution costs and no platform license fees. Just third party deals that bring in revenue outside of the traditional distribution channels.

Sublicenses are Ancillary Revenue Too

I always attempt to apply the same revenue model to sublicense deals as well. Although most major publishers now have direct distribution worldwide, often second tier publishers only distribute the game in one territory, but secure world wide rights. Then they sublicense the game in other sub territories. On these deals the regional sublicensed publisher often provides an advance to the publisher for the right to sell the game in that territory and gets a localized version of the master. In effect, they assume all of the marketing and distribution risks for the game in their territory. But instead of getting the negotiated royalty rate in these sublicensed territories, the developer only gets a percentage of the net received by the publisher, that is, a percentage of a percentage.

For example, if sublicensed distribution deal is at the same rate as the primary distribution area the developer takes a huge cut. At a 25% royalty for a game that, after allowed deductions, nets $24 the developer would get $6.00 royalty per unit. But in with a 25% sublicense, all other things being equal, the developer ends up getting only $1.50 per unit, and that’s assuming that the game sells at the same price point. Ouch!

The publisher, however, has none of the marketing or manufacturing expenses that it has in the core territory where it actually manufactures, markets and distributes the game. Often second tier publishers actually generate more revenue from these sublicenses than they do from direct sales, but with little or no risk or expense. So, if there is going to be any sublicensing, do your best to carve it out and get it treated just like any other ancillary revenue. Go for the same 50/50 split you should be pushing for with any other the ancillary revenue, and for the same reasons.
It All Starts at 50/50

So, always look for additional ways that your game might be being monetized. Think about what risk these revenue streams pose to the publisher. If there is little or no risk involved, press for a higher royalty rate on these revenues. Your publisher may not like it, but there is a valid logic to this arraignment and a strong argument in favor of it as well. You may not get it, but it is sure worth asking for. And one thing is for sure with publishers - if you don’t ask, you don’t get.
GL & HF!